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Parlor to Plate – July 3, 2024
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In the latest edition of the Parlor to Plate dairy podcast from Ever.Ag Insights, our all-star panel discusses the latest from USDA. What might the FMMO Recommended Decision mean for producers? Did the latest dairy trade data hold any surprises? And how did markets react to updated planting and grain stocks figures?
Join host Erica Maedke and panelists Brian Fletcher, Matt Tranel and Verl Prather for a spirited discussion.
Questions or comments? Topics you’d like to hear us discuss? Contact us at [email protected].
Show Transcript
(Transcript auto-generated)
00;00;00;10 – 00;00;08;18
VOICEOVER
Future trading involves risk and is not suitable for all investors. Content provided in this segment is meant for educational purposes and is not a solicitation to buy or sell commodities.
00;00;08;20 – 00;00;30;10
ERICA
Hello. Welcome to Parler to Play a weekly podcast from insights dedicated to offering listeners enlightening discussion and actionable intelligence about dairy markets. I’m your host, Erica mackey. We are excited to have you along today. If you like what you hear. Please like us! Subscribe and tell a friend or to timestamp in today’s episode. We are recording Wednesday, July 3rd around 1:00.
00;00;30;11 – 00;00;54;13
ERICA
Trade data has already landed, but Dairy products is not yet. So we will touch on that later in the show. A quick rundown of the markets. CME Black Cheddar at $1.90 per pound today, up $0.02 from last week. Barrels 190 unchanged spot butter at 314. That’s up $0.04 from last week. Nonfat dry milk closing at $1.18 down a penny on the week in the grain complex.
00;00;54;13 – 00;01;20;02
ERICA
The September corn contract is running about $4.06 a bushel. August soybeans, 1156, an August soybean meal at 350 per ton. It’s another week, another holiday week. And we have another all star panel from the financial services team bringing some fireworks and sparklers. We have rural appraiser who helps grain growers market their grain. Bryan Fletcher helping processors and end users manage their risk.
00;01;20;03 – 00;01;43;25
ERICA
And Matt Triano, who helps dairy producers manage their risks. It has been a busy week with a lot of numbers coming from USDA. So let’s start on the grain side of things. Last Friday we had two huge, very notable reports released. One being acreage and the second being quarterly stocks. So overall, can you give us a bit of a rundown of what was in there and ultimately what is the market’s take on those numbers?
00;01;43;28 – 00;02;11;18
VERL
Yeah, you bet. It’s certainly been an interesting week kind of kicking off for more of this podcast and let off last week the funds had continued to kind of sell pretty heavily into the corn market. As we approached Friday’s USDA report on Friday, the USDA did certainly give us some additional fireworks as they released an acreage estimate for corn that was 1.1 million acres above the average analyst guess.
00;02;11;18 – 00;02;41;08
VERL
And then the quarterly stocks also helped out the grain buyers as they were about 120 million bushels above the expected number that trade was looking for. And so, all in all, the bearish take that the funds took into Friday’s report held true all throughout Friday’s trade. After those numbers came out, corn was quick to find lower values. In fact, Front Month is now testing $4, which is a number that we haven’t seen since February.
00;02;41;08 – 00;03;02;26
VERL
And so all in all, I think it gives an opportunity to grain buyers to look at these values of corn as some of the best numbers that we’ve seen in quite a while. You know, one thing that I found that was pretty interesting, specific to the acreage, is that 300 million acres of that additional corn number was in Iowa alone, and then also on farm stocks.
00;03;02;26 – 00;03;30;02
VERL
The corn is fairly high, right, 61% of the June 1st stock number, which is close to 5 billion bushels, is believed to be in the producers hands. And so at some point ahead of harvest, those bushels do have to work their way into the pipeline. So what has been somewhat strengthened? Basis values as of late, may come to an end and give the corn buyers a bit of a reprieve here, as those bushels find their way to town.
00;03;30;04 – 00;03;39;03
ERICA
So overall, we’ve seen quite a bit of news about flooding lately. Do you have any take on where that is? Add that to these reports. What’s the outlook in the middle of the growing season?
00;03;39;03 – 00;04;03;15
VERL
Right now you bring up a solid point there, Erica, because all this to be said about Friday’s reports, you know, I think it still is important for a producer to not ignore his risk management practices because we still are within the critical growing season for corn within the United States. And all the flooding in the Western Corn Belt is certainly still being debated amongst traders.
00;04;03;16 – 00;04;18;15
VERL
The question, you know, remains that, hey, how many acres have actually been affected by this flood? And is it over some of those areas that have gotten the significant amounts of precipitation thus far are forecasted to receive more rain?
00;04;18;16 – 00;04;37;20
ERICA
So we got a lot of season left ahead of us before we actually get a crop in the bin. That’s right. Thanks for all for that. Switching gears on Monday. USDA released their recommended decision for changes to the federal milk marketing orders. So, as folks may know, we’ve been in a hearing process for well over a year now.
00;04;37;21 – 00;04;55;25
ERICA
This is the next step in the process. Our first peek at USDA is thinking in terms of making the changes. So Brian, how have people reacted? Can you give us a quick summary of what was in there as far as the major proposed changes and what that means, what people are still trying to analyze and figure out, especially from a risk management perspective?
00;04;56;00 – 00;05;36;14
BRIAN
Absolutely. Yeah. So Monday was a big day, and I would say since then, which about two full days since then, almost all of our conversations with clients in the industry has revolved around this. And I would imagine probably won’t die down any time soon. But to answer your first question, Erica, the recommended changes from a headline, a lot of them were focused on the class one side of the equation prior to, I want to say, 2018, the class one milk market was largely based on the higher price of class three and class four, and part of the recommended proposal was returning to that higher of function of class one.
00;05;36;14 – 00;05;59;12
BRIAN
Within that, there was also a subcategory of fluid milk, specifically ESL, that would have a different type of pricing mechanism that is more in line with where we are today in the fluid space that is more in line of an average of three and four, plus a driver with idea that it evolves over time as opposed to remaining a static number.
00;05;59;12 – 00;06;25;18
BRIAN
So I would say in general, there’s some backtracking of how it used to be price, but there’s also the idea for extended shelf life. Milk remains that aspect more in line with how fluid milk is price today. The other aspect of fluid milk. They are saying we want to update the class one differentials. So out of all the major categories, I would say two and a half of them are focused on the class one side of the equation.
00;06;25;18 – 00;06;48;15
BRIAN
The other aspect that they’re proposing is to increase the standard component levels to more reflect the actual protein levels in general milk across the country today. And if you were to look at that map, it’s hard because this is a big algebra equation that we’re looking at. But if you were to do that in turn, it would increase the milk price to the farmer.
00;06;48;15 – 00;07;15;25
BRIAN
And so there’s an element there saying we need to update this. What that means is in net it would marginally increase the price of milk. And then on another category they’re talking about updating the make allowance. And what that actually means is if you update the make allowance the net price would actually go down. So largely updating the components and updating them make allowance decreases the price of milk and the components would increase it.
00;07;15;25 – 00;07;36;16
BRIAN
So there is some netting the two out between the two. I think the interesting element of what’s proposed is the implementation timing of each of those don’t align at the same time. So the idea would be make allowances are updated effective as soon as there’s a vote, with the idea that the components are not implemented until a year down the road.
00;07;36;16 – 00;08;05;07
ERICA
So from a risk management perspective, really trying to dive in to see, you know, what that type of staggered implementation means to the market. And then last but not least, the one that I was actually quite surprised about was that they’re also proposing to remove barrels from within the class three milk price formula. Today, the barrel price is roughly a 50% weight of the cheese price within the class three formula.
00;08;05;07 – 00;08;34;28
BRIAN
What they’re proposing is making the 40 pound block price are 100% of the weight in the class three formula, and I would say that’s a pretty big structural change with how number one, how the class three milk market is priced. And then it brings in a lot of questions of how is the cheese market going to evolve with this type of transition, all of which, you know, are active conversations and strategies going on on how to evolve the cheese market with this type of structural change.
00;08;34;28 – 00;09;05;10
BRIAN
So those are the big ticket items. And one thing I would say about it is our team is actively trying to learn as much as possible and has done a really good job just educating me on it. And also clients. And I would encourage anybody that’s really interested in this to reach out to us. Phil Lord, Bill Curly and Steve Spencer put together a webinar yesterday really highlighting the big picture items of where we are in this process and what’s at stake here that is available to ever AG Insights clients.
00;09;05;10 – 00;09;23;26
BRIAN
So please reach out to us and we’ll make sure to give that to you. And then also in general reach out to us just in terms of having access to that team where they’re fully focused on the policy element, and we’re happy to help any way possible. So just want to put that out there, that anything I’ve learned, I’ve been learning from our broader team at this point.
00;09;24;01 – 00;09;51;13
ERICA
Thanks for that overview, Brian. Certainly a lot of complexities there and definitely something we’re trying to support our clients through. And just to remind folks, this is a recommended decision. This is not the final. So right now we are working with what is likely to be the final decision, but isn’t guaranteed. So from a timing perspective, Federal Register publication and then a 60 day comment period, a vote by producers before finally being implemented, I don’t think it’s going to take forever.
00;09;51;13 – 00;10;10;29
BRIAN
I mean, it’s within the next 12 months, but it is going to take a while before we know with certainty what the rules are going to look like. Absolutely. And I would say as soon as this next phase of the process is open, it’s very important for the industry to educate themselves at what’s at stake. And the industry has a voice in the set of the process.
00;10;10;29 – 00;10;32;19
BRIAN
So USDA is still going to be considering comments from the industry into their final decision. And so it is a point in time where step one, actively educating yourself on it. And then within that, making any comments or suggestions to USDA about what they’re proposing right now, the idea that, you know, it can continue to evolve from here.
00;10;32;20 – 00;11;01;18
ERICA
Good analysis Brian. Thanks for all that detail. Some of the news today in the dairy space. Again, trade data landed may numbers for cheese exports 106 million pounds. That’s up 47% from last year. So certainly very strong their butter. We imported a record 13 million pounds into the United States. That’s up 24% year over year. Nonfat. However, exports out of the United States were a little bit light 134 million pounds, down 24% year over year.
00;11;01;19 – 00;11;19;28
ERICA
And then way dry way was flat, but high protein whey was certainly strong, up 19% year over year. Matt, as you think about what this means for dairy producers, I would say certainly on the cheese side of things, that should have been good for revenue with very strong cheese and exports. The rest of the complex maybe not so strong.
00;11;19;29 – 00;11;26;24
ERICA
Again, we listened to rural talk about lots of corn milk prices up and down, where our producers thinking these days.
00;11;26;28 – 00;11;42;25
MATT
Yes, the class three prices have been kind of all over the board recently. I’ve seen a little bit of a dip, but today we were up about a quarter. Yeah, that cheese data certainly did not hurt. See another hundred and 6 million pounds leave our shores in record amounts going off to Mexico at 40 million. So farmers are very ecstatic about that.
00;11;42;25 – 00;12;10;29
MATT
Prices still are anywhere from $19.5 up to $20.5. That’s on a class three basis. Class four prices are a little bit stronger than that when you look at and late December, corn prices against that and soybean meal prices against that. The dairy margins look very strong, at least on a paper standpoint, from a futures value. When you look at and hear from dairy farmers in regards to basis for oil, I mentioned earlier that it’s getting a little bit tougher to peel the corn out of farmers hands because prices have gotten so low.
00;12;11;00 – 00;12;33;21
MATT
A lot of our Western dairy farmers have had a tough time acquiring that corn at a price that they are comfortable with, or would say that brings on a very profitable margin in the real world. So what are the other issues that dairy farmers continue to see are that basis number replacement animals, labor, other inflationary cost, one interesting one that we’ve kind of paid attention to over the last month or so, given the big run has been energy prices.
00;12;33;21 – 00;12;55;24
MATT
Crude oil prices are up $10 a barrel, diesel prices are up $0.30 a gallon. And a few of the reasons for that. Late May, we saw OPEC plus continue their production cuts through Q3. We saw some storm premiums come to the market due to the hurricane barrel headed toward the Gulf. And then we also saw some inventories drop here as we go into the Independence Day holiday, as there’s a ton of travel.
00;12;55;24 – 00;12;59;19
MATT
So that’s maybe one of the other costs that dairy farmers have seen increase here as of.
00;12;59;19 – 00;13;21;02
BRIAN
Recent Matt, question for you. You’ve highlighted some of the inflationary costs between crude and other aspects. I know a big part of the conversation we’ve been having internally is on a forward looking basis. These margins on farm are the best they’ve been, I want to say, in over a decade. What’s your general anticipation of milk production moving forward?
00;13;21;02 – 00;13;33;18
BRIAN
Right now, netting all of that together is the idea that we’ll continue to struggle and produce at a deficit for a while. Or are these increase margins changing the idea of whether or not milk can come back?
00;13;33;23 – 00;13;58;21
MATT
Yeah. So I think I mean, in normal times when replacement animals are readily available, one would definitely say that production would follow and we would see some increases in a short period of time, this time with cattle inventory the way it is, it’s not quite as likely to pick up nearly as quickly. But at the same time, dairy farmers from past history have proven that they will find ways to produce milk if the margins are there.
00;13;58;21 – 00;14;06;12
MATT
And so I would anticipate dairy farmers to do everything they can in order to improve production and take advantage of the margins as quickly as they possibly can.
00;14;06;15 – 00;14;07;00
BRIAN
Thank you.
00;14;07;02 – 00;14;14;06
MATT
So, Brian, question for you. We’ve had a good string of months in regards to cheese exports. Do you see that continuing moving forward?
00;14;14;06 – 00;14;48;25
BRIAN
You’re right that we’ve had a great record setting stretch of U.S. cheese exports. And I think the first time in record we’ve had three consecutive months of exporting over 100 million pounds of cheese, and I don’t believe we’ve ever had a single month prior to that. So year to date, we’re up 28%. And, Matt, I think at least the way we’re looking at it right now, over the course of January through April, most of the time, the US cheese pricing was anywhere between $1.40 a pound and $1.50 a pound.
00;14;48;25 – 00;15;22;12
BRIAN
And the lowest comparable prices we were having around the world were coming out of Europe. And their pricing at that point in time was closer to $1.75 to $1.80. So we had anywhere between 25 to $0.30 of a clear absolute price advantage versus competing supply regions around the world. That clearly led to not only spot exports, but also, I think May is a good testament that it also allowed the market to contract exports, at least for shorter duration time.
00;15;22;12 – 00;15;48;15
BRIAN
But I would imagine the magnitude of exports now that current pricing, say, in the one 90s in the US and the one 90s in Europe, and I believe even GDP yesterday had 190 for those European models. But prices in the one 90s as well, now that we’re neck and neck with other supply regions around the world, I would say newer deals being established are going to be much more challenging to come by.
00;15;48;15 – 00;16;16;10
BRIAN
It doesn’t mean the by the time we see June numbers roll around, it doesn’t mean that we’re going to collapse those. I think May’s a great example that a lot of those exports. It was some combination of spot and forward booked exports and maybe some of that continues through June. But as we move forward in time, if we’re going to continue to trade current pricing around parity to Europe, then I think it makes generally exporting a lot more challenging.
00;16;16;10 – 00;16;40;21
BRIAN
Specifically, if you were to look in today’s report, you’ll see that where we’re sending products over the course of this year, it’s been very diverse. Mexico is taking in almost 180 million pounds, but we also have South Korea, Japan that we’ve export a lot more to so far this year. And I would imagine those Southeast Asian countries are the ones that will become more of a competitive nature as we move forward.
00;16;40;21 – 00;16;58;29
BRIAN
So to answer your question, I personally feel like it’s going to be a lot more challenging. I would say the magnitude of increases is probably in jeopardy at this point, although I just don’t know that it’s going to be June where we see a huge taper. I would say more. So once we get into the back half of this year.
00;16;59;01 – 00;17;16;21
ERICA
A big thank you to overall, Brian and Matt for joining me on today’s episode and sharing your insights with our listeners. For those of you who want to learn more about Federal Milk marketing orders and this latest decision, please do give us a call. We’ve got some excellent economists and policy experts on our staff. More than happy to help out our clients.
00;17;16;21 – 00;17;32;25
ERICA
Thank you, as always to our media team for mixing and mastering this production. And thank you to our listeners. If you like what you hear, subscribe on your favorite app. Wishing everyone a safe and happy 4th of July. And if you’d like to hear more about how we help people manage risk, please contact us at insights at ever.ag.
Disclaimer: TRADING FUTURES AND OPTIONS ON FUTURES INVOLVES SIGNIFICANT RISK OF LOSS AND MAY NOT BE SUITABLE FOR EVERYONE. THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THE INFORMATION AND COMMENTS CONTAINED HEREIN ARE PROVIDED BY EVER.AG AS GENERAL COMMENTARY OF MARKET CONDITIONS. THIS INFORMATION SHOULD NOT BE INTERPRETED AS TRADING ADVICE OR RECOMMENDATION WITHOUT FURTHER DISCUSSION WITH YOUR EVER.AG ADVISOR. THIS IS A MATTER OF SOLICITATION.
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By Ever.Ag
5
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Listen Now
In the latest edition of the Parlor to Plate dairy podcast from Ever.Ag Insights, our all-star panel discusses the latest from USDA. What might the FMMO Recommended Decision mean for producers? Did the latest dairy trade data hold any surprises? And how did markets react to updated planting and grain stocks figures?
Join host Erica Maedke and panelists Brian Fletcher, Matt Tranel and Verl Prather for a spirited discussion.
Questions or comments? Topics you’d like to hear us discuss? Contact us at [email protected].
Show Transcript
(Transcript auto-generated)
00;00;00;10 – 00;00;08;18
VOICEOVER
Future trading involves risk and is not suitable for all investors. Content provided in this segment is meant for educational purposes and is not a solicitation to buy or sell commodities.
00;00;08;20 – 00;00;30;10
ERICA
Hello. Welcome to Parler to Play a weekly podcast from insights dedicated to offering listeners enlightening discussion and actionable intelligence about dairy markets. I’m your host, Erica mackey. We are excited to have you along today. If you like what you hear. Please like us! Subscribe and tell a friend or to timestamp in today’s episode. We are recording Wednesday, July 3rd around 1:00.
00;00;30;11 – 00;00;54;13
ERICA
Trade data has already landed, but Dairy products is not yet. So we will touch on that later in the show. A quick rundown of the markets. CME Black Cheddar at $1.90 per pound today, up $0.02 from last week. Barrels 190 unchanged spot butter at 314. That’s up $0.04 from last week. Nonfat dry milk closing at $1.18 down a penny on the week in the grain complex.
00;00;54;13 – 00;01;20;02
ERICA
The September corn contract is running about $4.06 a bushel. August soybeans, 1156, an August soybean meal at 350 per ton. It’s another week, another holiday week. And we have another all star panel from the financial services team bringing some fireworks and sparklers. We have rural appraiser who helps grain growers market their grain. Bryan Fletcher helping processors and end users manage their risk.
00;01;20;03 – 00;01;43;25
ERICA
And Matt Triano, who helps dairy producers manage their risks. It has been a busy week with a lot of numbers coming from USDA. So let’s start on the grain side of things. Last Friday we had two huge, very notable reports released. One being acreage and the second being quarterly stocks. So overall, can you give us a bit of a rundown of what was in there and ultimately what is the market’s take on those numbers?
00;01;43;28 – 00;02;11;18
VERL
Yeah, you bet. It’s certainly been an interesting week kind of kicking off for more of this podcast and let off last week the funds had continued to kind of sell pretty heavily into the corn market. As we approached Friday’s USDA report on Friday, the USDA did certainly give us some additional fireworks as they released an acreage estimate for corn that was 1.1 million acres above the average analyst guess.
00;02;11;18 – 00;02;41;08
VERL
And then the quarterly stocks also helped out the grain buyers as they were about 120 million bushels above the expected number that trade was looking for. And so, all in all, the bearish take that the funds took into Friday’s report held true all throughout Friday’s trade. After those numbers came out, corn was quick to find lower values. In fact, Front Month is now testing $4, which is a number that we haven’t seen since February.
00;02;41;08 – 00;03;02;26
VERL
And so all in all, I think it gives an opportunity to grain buyers to look at these values of corn as some of the best numbers that we’ve seen in quite a while. You know, one thing that I found that was pretty interesting, specific to the acreage, is that 300 million acres of that additional corn number was in Iowa alone, and then also on farm stocks.
00;03;02;26 – 00;03;30;02
VERL
The corn is fairly high, right, 61% of the June 1st stock number, which is close to 5 billion bushels, is believed to be in the producers hands. And so at some point ahead of harvest, those bushels do have to work their way into the pipeline. So what has been somewhat strengthened? Basis values as of late, may come to an end and give the corn buyers a bit of a reprieve here, as those bushels find their way to town.
00;03;30;04 – 00;03;39;03
ERICA
So overall, we’ve seen quite a bit of news about flooding lately. Do you have any take on where that is? Add that to these reports. What’s the outlook in the middle of the growing season?
00;03;39;03 – 00;04;03;15
VERL
Right now you bring up a solid point there, Erica, because all this to be said about Friday’s reports, you know, I think it still is important for a producer to not ignore his risk management practices because we still are within the critical growing season for corn within the United States. And all the flooding in the Western Corn Belt is certainly still being debated amongst traders.
00;04;03;16 – 00;04;18;15
VERL
The question, you know, remains that, hey, how many acres have actually been affected by this flood? And is it over some of those areas that have gotten the significant amounts of precipitation thus far are forecasted to receive more rain?
00;04;18;16 – 00;04;37;20
ERICA
So we got a lot of season left ahead of us before we actually get a crop in the bin. That’s right. Thanks for all for that. Switching gears on Monday. USDA released their recommended decision for changes to the federal milk marketing orders. So, as folks may know, we’ve been in a hearing process for well over a year now.
00;04;37;21 – 00;04;55;25
ERICA
This is the next step in the process. Our first peek at USDA is thinking in terms of making the changes. So Brian, how have people reacted? Can you give us a quick summary of what was in there as far as the major proposed changes and what that means, what people are still trying to analyze and figure out, especially from a risk management perspective?
00;04;56;00 – 00;05;36;14
BRIAN
Absolutely. Yeah. So Monday was a big day, and I would say since then, which about two full days since then, almost all of our conversations with clients in the industry has revolved around this. And I would imagine probably won’t die down any time soon. But to answer your first question, Erica, the recommended changes from a headline, a lot of them were focused on the class one side of the equation prior to, I want to say, 2018, the class one milk market was largely based on the higher price of class three and class four, and part of the recommended proposal was returning to that higher of function of class one.
00;05;36;14 – 00;05;59;12
BRIAN
Within that, there was also a subcategory of fluid milk, specifically ESL, that would have a different type of pricing mechanism that is more in line with where we are today in the fluid space that is more in line of an average of three and four, plus a driver with idea that it evolves over time as opposed to remaining a static number.
00;05;59;12 – 00;06;25;18
BRIAN
So I would say in general, there’s some backtracking of how it used to be price, but there’s also the idea for extended shelf life. Milk remains that aspect more in line with how fluid milk is price today. The other aspect of fluid milk. They are saying we want to update the class one differentials. So out of all the major categories, I would say two and a half of them are focused on the class one side of the equation.
00;06;25;18 – 00;06;48;15
BRIAN
The other aspect that they’re proposing is to increase the standard component levels to more reflect the actual protein levels in general milk across the country today. And if you were to look at that map, it’s hard because this is a big algebra equation that we’re looking at. But if you were to do that in turn, it would increase the milk price to the farmer.
00;06;48;15 – 00;07;15;25
BRIAN
And so there’s an element there saying we need to update this. What that means is in net it would marginally increase the price of milk. And then on another category they’re talking about updating the make allowance. And what that actually means is if you update the make allowance the net price would actually go down. So largely updating the components and updating them make allowance decreases the price of milk and the components would increase it.
00;07;15;25 – 00;07;36;16
BRIAN
So there is some netting the two out between the two. I think the interesting element of what’s proposed is the implementation timing of each of those don’t align at the same time. So the idea would be make allowances are updated effective as soon as there’s a vote, with the idea that the components are not implemented until a year down the road.
00;07;36;16 – 00;08;05;07
ERICA
So from a risk management perspective, really trying to dive in to see, you know, what that type of staggered implementation means to the market. And then last but not least, the one that I was actually quite surprised about was that they’re also proposing to remove barrels from within the class three milk price formula. Today, the barrel price is roughly a 50% weight of the cheese price within the class three formula.
00;08;05;07 – 00;08;34;28
BRIAN
What they’re proposing is making the 40 pound block price are 100% of the weight in the class three formula, and I would say that’s a pretty big structural change with how number one, how the class three milk market is priced. And then it brings in a lot of questions of how is the cheese market going to evolve with this type of transition, all of which, you know, are active conversations and strategies going on on how to evolve the cheese market with this type of structural change.
00;08;34;28 – 00;09;05;10
BRIAN
So those are the big ticket items. And one thing I would say about it is our team is actively trying to learn as much as possible and has done a really good job just educating me on it. And also clients. And I would encourage anybody that’s really interested in this to reach out to us. Phil Lord, Bill Curly and Steve Spencer put together a webinar yesterday really highlighting the big picture items of where we are in this process and what’s at stake here that is available to ever AG Insights clients.
00;09;05;10 – 00;09;23;26
BRIAN
So please reach out to us and we’ll make sure to give that to you. And then also in general reach out to us just in terms of having access to that team where they’re fully focused on the policy element, and we’re happy to help any way possible. So just want to put that out there, that anything I’ve learned, I’ve been learning from our broader team at this point.
00;09;24;01 – 00;09;51;13
ERICA
Thanks for that overview, Brian. Certainly a lot of complexities there and definitely something we’re trying to support our clients through. And just to remind folks, this is a recommended decision. This is not the final. So right now we are working with what is likely to be the final decision, but isn’t guaranteed. So from a timing perspective, Federal Register publication and then a 60 day comment period, a vote by producers before finally being implemented, I don’t think it’s going to take forever.
00;09;51;13 – 00;10;10;29
BRIAN
I mean, it’s within the next 12 months, but it is going to take a while before we know with certainty what the rules are going to look like. Absolutely. And I would say as soon as this next phase of the process is open, it’s very important for the industry to educate themselves at what’s at stake. And the industry has a voice in the set of the process.
00;10;10;29 – 00;10;32;19
BRIAN
So USDA is still going to be considering comments from the industry into their final decision. And so it is a point in time where step one, actively educating yourself on it. And then within that, making any comments or suggestions to USDA about what they’re proposing right now, the idea that, you know, it can continue to evolve from here.
00;10;32;20 – 00;11;01;18
ERICA
Good analysis Brian. Thanks for all that detail. Some of the news today in the dairy space. Again, trade data landed may numbers for cheese exports 106 million pounds. That’s up 47% from last year. So certainly very strong their butter. We imported a record 13 million pounds into the United States. That’s up 24% year over year. Nonfat. However, exports out of the United States were a little bit light 134 million pounds, down 24% year over year.
00;11;01;19 – 00;11;19;28
ERICA
And then way dry way was flat, but high protein whey was certainly strong, up 19% year over year. Matt, as you think about what this means for dairy producers, I would say certainly on the cheese side of things, that should have been good for revenue with very strong cheese and exports. The rest of the complex maybe not so strong.
00;11;19;29 – 00;11;26;24
ERICA
Again, we listened to rural talk about lots of corn milk prices up and down, where our producers thinking these days.
00;11;26;28 – 00;11;42;25
MATT
Yes, the class three prices have been kind of all over the board recently. I’ve seen a little bit of a dip, but today we were up about a quarter. Yeah, that cheese data certainly did not hurt. See another hundred and 6 million pounds leave our shores in record amounts going off to Mexico at 40 million. So farmers are very ecstatic about that.
00;11;42;25 – 00;12;10;29
MATT
Prices still are anywhere from $19.5 up to $20.5. That’s on a class three basis. Class four prices are a little bit stronger than that when you look at and late December, corn prices against that and soybean meal prices against that. The dairy margins look very strong, at least on a paper standpoint, from a futures value. When you look at and hear from dairy farmers in regards to basis for oil, I mentioned earlier that it’s getting a little bit tougher to peel the corn out of farmers hands because prices have gotten so low.
00;12;11;00 – 00;12;33;21
MATT
A lot of our Western dairy farmers have had a tough time acquiring that corn at a price that they are comfortable with, or would say that brings on a very profitable margin in the real world. So what are the other issues that dairy farmers continue to see are that basis number replacement animals, labor, other inflationary cost, one interesting one that we’ve kind of paid attention to over the last month or so, given the big run has been energy prices.
00;12;33;21 – 00;12;55;24
MATT
Crude oil prices are up $10 a barrel, diesel prices are up $0.30 a gallon. And a few of the reasons for that. Late May, we saw OPEC plus continue their production cuts through Q3. We saw some storm premiums come to the market due to the hurricane barrel headed toward the Gulf. And then we also saw some inventories drop here as we go into the Independence Day holiday, as there’s a ton of travel.
00;12;55;24 – 00;12;59;19
MATT
So that’s maybe one of the other costs that dairy farmers have seen increase here as of.
00;12;59;19 – 00;13;21;02
BRIAN
Recent Matt, question for you. You’ve highlighted some of the inflationary costs between crude and other aspects. I know a big part of the conversation we’ve been having internally is on a forward looking basis. These margins on farm are the best they’ve been, I want to say, in over a decade. What’s your general anticipation of milk production moving forward?
00;13;21;02 – 00;13;33;18
BRIAN
Right now, netting all of that together is the idea that we’ll continue to struggle and produce at a deficit for a while. Or are these increase margins changing the idea of whether or not milk can come back?
00;13;33;23 – 00;13;58;21
MATT
Yeah. So I think I mean, in normal times when replacement animals are readily available, one would definitely say that production would follow and we would see some increases in a short period of time, this time with cattle inventory the way it is, it’s not quite as likely to pick up nearly as quickly. But at the same time, dairy farmers from past history have proven that they will find ways to produce milk if the margins are there.
00;13;58;21 – 00;14;06;12
MATT
And so I would anticipate dairy farmers to do everything they can in order to improve production and take advantage of the margins as quickly as they possibly can.
00;14;06;15 – 00;14;07;00
BRIAN
Thank you.
00;14;07;02 – 00;14;14;06
MATT
So, Brian, question for you. We’ve had a good string of months in regards to cheese exports. Do you see that continuing moving forward?
00;14;14;06 – 00;14;48;25
BRIAN
You’re right that we’ve had a great record setting stretch of U.S. cheese exports. And I think the first time in record we’ve had three consecutive months of exporting over 100 million pounds of cheese, and I don’t believe we’ve ever had a single month prior to that. So year to date, we’re up 28%. And, Matt, I think at least the way we’re looking at it right now, over the course of January through April, most of the time, the US cheese pricing was anywhere between $1.40 a pound and $1.50 a pound.
00;14;48;25 – 00;15;22;12
BRIAN
And the lowest comparable prices we were having around the world were coming out of Europe. And their pricing at that point in time was closer to $1.75 to $1.80. So we had anywhere between 25 to $0.30 of a clear absolute price advantage versus competing supply regions around the world. That clearly led to not only spot exports, but also, I think May is a good testament that it also allowed the market to contract exports, at least for shorter duration time.
00;15;22;12 – 00;15;48;15
BRIAN
But I would imagine the magnitude of exports now that current pricing, say, in the one 90s in the US and the one 90s in Europe, and I believe even GDP yesterday had 190 for those European models. But prices in the one 90s as well, now that we’re neck and neck with other supply regions around the world, I would say newer deals being established are going to be much more challenging to come by.
00;15;48;15 – 00;16;16;10
BRIAN
It doesn’t mean the by the time we see June numbers roll around, it doesn’t mean that we’re going to collapse those. I think May’s a great example that a lot of those exports. It was some combination of spot and forward booked exports and maybe some of that continues through June. But as we move forward in time, if we’re going to continue to trade current pricing around parity to Europe, then I think it makes generally exporting a lot more challenging.
00;16;16;10 – 00;16;40;21
BRIAN
Specifically, if you were to look in today’s report, you’ll see that where we’re sending products over the course of this year, it’s been very diverse. Mexico is taking in almost 180 million pounds, but we also have South Korea, Japan that we’ve export a lot more to so far this year. And I would imagine those Southeast Asian countries are the ones that will become more of a competitive nature as we move forward.
00;16;40;21 – 00;16;58;29
BRIAN
So to answer your question, I personally feel like it’s going to be a lot more challenging. I would say the magnitude of increases is probably in jeopardy at this point, although I just don’t know that it’s going to be June where we see a huge taper. I would say more. So once we get into the back half of this year.
00;16;59;01 – 00;17;16;21
ERICA
A big thank you to overall, Brian and Matt for joining me on today’s episode and sharing your insights with our listeners. For those of you who want to learn more about Federal Milk marketing orders and this latest decision, please do give us a call. We’ve got some excellent economists and policy experts on our staff. More than happy to help out our clients.
00;17;16;21 – 00;17;32;25
ERICA
Thank you, as always to our media team for mixing and mastering this production. And thank you to our listeners. If you like what you hear, subscribe on your favorite app. Wishing everyone a safe and happy 4th of July. And if you’d like to hear more about how we help people manage risk, please contact us at insights at ever.ag.
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